Renowned University of Pennsylvania finance professor Jeremy Siegel believes that the fate of investors is in the hands of the Federal Reserve this year. If central bank officials “respond” to disappearing inflation and slowing economic growth by cutting interest rates, then stocks will rise.
“If they respond, I think we’ll have a very good year – 15% or more total return,” Siegel SPOKE CNBC Wednesday. “[But] if the Fed doesn’t cut, then it will be tougher sledding for the markets. I wouldn’t say a crash or anything in that sense, but I think it’s going to be a lot harder sledding.
The Fed raised rates from near zero in March 2022 to 5% to 5.25% today, increasing borrowing costs across the economy in hopes of controlling inflation. And so far, bank officials have slowly achieved their goal, with help from the recovery supply chains and below commodity price.
Year-over-year inflation, as measured by the consumer price index, fell from June this four decades long of 9.1% to 4.9% last month. That’s well above the Fed’s 2% target, but Siegel argued Thursday that the downward trajectory was enough for officials to halt their aggressive campaign to fight inflation. The economy is already facing “several months of negative growth,” and hiring is likely to slow as the cumulative effect of Fed rate hikes continues this year, according to the professor.
A slowing economy and rising unemployment will put pressure on Powell and other Fed officials to cut rates as the year progresses, said Siegel, who is based at the University of Pennsylvania’s Wharton business school. He noted that the Fed’s dual mandate requires officials to not only ensure price stability, but also maximum employment for the economy.
“Inflation has come down,” he said. “Not by 2%, but it’s definitely falling. And you have to start looking not only at that [inflation]but the employment order that the Fed has.”
Siegel’s latest prediction reaffirms a call he made late last year that was unusual on Wall Street. The Wharton professor says stocks will rise 15% to 20% by 2023 due to the disappearance of inflation and the Fed’s rate cut in December.
“I think we should have a very good year for equities… I believe that the earnings outlook for next year may remain stronger than feared,” he wrote in his weekly WisdomTree Commentarywhich argues that the US economy can handle a mild recession if it comes too.
On Thursday, Siegel was asked if he stood by that theory after recent comments from hedge fund titan Stanley Druckenmiller, who warned of a “hard landing” during the 2023 Sohn Investment Conference Tuesday.
“There are things under the hood,” Druckenmiller, the billionaire founder of the Duquesne Family Office, said at the conference. “School has started. Obviously, the regional banks, we just had Bed Bath & Beyond, but I think there will be more bodies coming.
But Siegel said he’s not as concerned about potential under-the-radar economic issues as Druckenmiller. There is more consolidation in the banking sector, and perhaps more failures of struggling businesses like Bed, Bath, & Beyond, but overall the economy remains strong.
“Even in a recession, which, if it comes, I think it will be mild, I don’t see anything ringing out of the economy like we did in 2008 and 2009,” he said. “Absolutely not.”